The yen plunged after finance minister Kiichi Miyazawa said that Japan had been discussing its currency's recent rise with the Group of Seven industrialised nations. The move helped the benchmark Nikkei 225 index to reverse earlier losses.
"The implications of currency moves cannot be ignored," said Paul Migliorato at Commerz Securities. "A lot of people are interested in buying blue chips, but only if the currency stabilises and doesn't show signs of going to 100."
The Nikkei 225 fluctuated last week from a high of 17,988.59 to a low of 17,058.13, finishing on Friday at 17,342.27 - a 2 per cent decline in the week. The Jasdaq over-the-counter market slumped 8.4 per cent in three days, ending a 16-day, 25.3 per cent rally.
The yen rose as much as 1.94 per cent in the week to 103.2 to the dollar, a 40-month high against the US currency. The yen recently traded at 106.76, close to where it was at the beginning of the week.
There has been speculation that the US has asked Japan to increase its money supply through lower short-term interest rates before it co-operates with Japan to weaken the yen. "The direct impact of an intervention on bonds isn't straightforward, said Takeshi Naito, economist at Daiwa Securities. "A weaker yen is bad for Japanese government bonds, but the central bank may be forced to pump more funds into the banking system, which ultimately could be good for bonds." Last week the benchmark 10-year government bond yield fell nine basis points to 1.705 per cent.
Expectations that other nations may help Japan stem the rising yen helped reverse losses on Friday by the Nikkei, which ended the day up for the first time in three days, boosted by gains in Canon and other exporters.
Mr Miyazawa may discuss intervention at the G7 meeting, which begins on 25 September. Japan's deputy finance minister for international affairs, Haruhiko Kuroda, flew to Washington on Thursday to meet US Treasury officials.
"The actions by Kuroda and comments by Miyazawa have increased the likelihood of concerted intervention in the foreign exchange markets," said Hiromasa Hirai at Ikeda Investment Management.Reuse content